WEX Inc. (WEX) Earnings Call Transcript & Summary

All right. Let's get started. My name is Chris, and I'm an analyst as part of the UBS Payments and Fintech team. We're very excited to have Melissa Smith here with us from WEX. And I think this -- so it's your first time in quite a few years, and good to have you and heard your third quarter update. I guess maybe just to kick it off, it would be great to hear your key priorities, what's on top of your head heading into 2026.

Sure. Happy to be here. to say it's the first time it's been -- I think I was back in...

In a couple of years. Great to have you.

I was here for a long time, but it's been a few years. So the key priorities for us going into next year, we have 3 strategic priorities. We want to make sure that we continue to build on our core. So enhancing our core, we want to extend our reach, and we want to accelerate innovation. And if I think about each of those things, enhancing our core is really about making sure that we're bringing in sales we're retaining customers across our portfolio. And a great example of that for us as we go into next year is BP. So as BP makes their migration over, we think of that as a wonderful way of just continuing to build on the core that we have. As we're extending our reach, the places that we've been really focused is where we can take our product and extend it into new TAMs. 10-4 is a great example of that, we're extending into the owner-operator marketplace and breathing new life into some of these products. Same thing with BP came on board because of an enhanced acceptance product. And we have built an ability to sell outside of travel, our embedded payments capability. So when you think about, those are new products, that are something that's really important for us to continue to build on in 2026. And then when we think about innovation and accelerating innovation, we're thinking about how you can deploy AI and other sources of technology to really reimagine customer experiences. And so those are -- when we think about next year, the things that we're really focused on.

All right. Awesome. Thanks for the overview. And I guess maybe just looking back at this year and especially in the fourth quarter, it's almost a month ago and -- but it's been over a month since you reported Q3. Maybe can you give us an update on how the business has been versus your expectations in the fourth quarter?

Happy to. Yes, I'm happy to. So if you look at our spend volume and the way that we think about business and what we had projected forth for revenue, we're seeing trends coming in pretty similar to what we had expected, so kind of largely in line. And if you look across the portfolio, we've continued to see really strong sales. And so one of the things that we're excited about is how -- not only just we're ending 2024, but how that will project into -- not 2024, 2025 and how that will project into 2026.

All right. Awesome. And just -- yes, as you mentioned, just exiting 2025, right, what are some of the maybe moving pieces or incremental moving pieces we're getting really granular here, that moving pieces that will make you feel more encouraged or more cautious about next year?

Yes. I'll start on the things that I'm really bullish about. So when I talked about the new sales momentum, that's something you don't typically see a lot of benefit of in the year in, and you start to see the incremental benefits of that going into the next year. And so as we've had a strong sales year this year, that will benefit 2026. We also -- I talked about the fact that we've got new products that we're moving into the marketplace. I'm really excited about this, not just in the products that we're rolling out right now, but the idea that we have enabled our ability to create products and commercialize them in the markets that we're in, and we're doing that at greater velocity. So that's something that I'm really excited about. The BB migration that will happen during 2026, that will be an incremental benefit for us as well. The sales that we're seeing specifically in AP Direct in our embedded payments products as we're going through implementation cycles, that's -- I'm excited about that as well. And so far, we're still -- we're about a month into open enrollment, but open enrollment has gone as we would have expected and is looking positive for us as well. And so those are things I would put in the, I'm excited about category. And I think that the biggest thing that I'm still -- on my watch list is what's happening from a macro perspective. We've seen tension against same-store sales across our mobility business, and that's been true through the course of this year. And so that's not something that we've seen improve. And so that's -- I would say the thing that I have the most on my watch list and what we're really focused on the things that we can control. So new sales, customer retention and making sure that we're delivering these new products in the market.

All right. Awesome. That's an amazing overview of some of the topics we're going to dive into. So maybe that's great. Diving into the segments. Well, let's start with mobility. As you start to see momentum in the SMB side of mobility, maybe can you remind us or maybe provide some sizing for the potential customer TAM with the SMBs and the current level of penetration relative to the other fleet segments that are potentially more penetrated?

Yes. So if you look at the mobility market itself, you'll see when you get into vehicle sizes above 250 vehicles, it's much more penetrated. And so as we're winning business, those are typically competitive takeaways. When you get under 25 vehicles, you get into a really open marketplace. There are millions of small businesses that have fleets. And as we're looking at areas to -- for us to continue to grow, this has been an area that we've been really focused on because we have the ability to extend credit in a way that we have proven to be quite secure. And we know that there are customers that are looking for the controls capability that we can provide as well as the credit extension and all of the ability to save, which is part of the value proposition for us is when they use our products, they have to -- they don't have to worry about misuse, but also they're saving. And so as we've extended the product in that space, we're seeing a really great uplift. We know that when we spend $1 in marketing, we get $4 back within a 2-year period of time. And so we have been putting more money into that marketing channel. We've seen a 12% increase in new sales with small businesses year-over-year. And so this is part of the marketplace, we're really excited about. We think it's big. It's -- there's a lot of opportunity for us. And so far, we're playing well in that.

All right. That's awesome. And then on the -- I guess, on the portfolio win side, I think you mentioned BP. And I guess beyond BP, right, after the spin, there may not be as many field label retailers that remain that are not using the commercial platform, but maybe how do you think about the opportunities beyond the spin and maybe some of the share gain opportunities in the segment?

Yes. So BP is -- that puts all 10 of the largest oil companies in the United States that will be private labeling for. And so you're right. We're excited about BP coming on. We think it's a great win. They came to us in large part because of the enhanced acceptance product that we have in the marketplace. And so they'll be the first to test a new product with us, and we're really excited about that. In terms of beyond that, we have added new private label relationships outside the United States. They're typically not as large in size, but we will continue to look at that as an area of growth. And as we talked about earlier, really our biggest focus has been around the small business segment is in the untapped part of the marketplace and then adding a new product capability into the existing customer base.

All right. Awesome. And as mentioned, some of the opportunities you're seeing outside of the U.S., maybe can you just give us some of the sizing of your business or what's the current mix right now?

Yes. So 85% of the business is in the United States. So the rest of the business, we're in mobility specifically, we're in Europe and Australia. And both of those places, Australia, we have a great business. We continue to grow that -- in that marketplace. I would say, think of that as a relatively small market. Europe, we're a much smaller player in the European marketplace, and we're representing largely Esso's brand in the European marketplace. And so it's an area for us that it's not been the highest area of focus for us. When we think about incremental dollars we're going to invest, we've largely invested them in the United States.

Understood. That's very helpful. And maybe just looking beyond next year and kind of longer-term building blocks of the growth in this segment. Maybe can you just, I guess, maybe just looking ahead -- yes, I guess maybe let's just talk about maybe the longer-term building blocks first, and then I'll have a follow-up on 2026.

Yes. When I think about the growth algorithm for our mobility business, the way that we have historically grown the business is we're bringing new customers, retain existing customers. We accrete a little bit on price each year. And then typically, we get a little positive for same-store sales. So I think about the world we're in right now, we're doing really well in selling. We're doing well in retention. We are accreting a little bit on price and same-store sales have been really the thing that's deviated from what I would say is our normal growth algorithm. We think of that as a transient issue. So we think of that as historically in the 20-plus years that we've been in the business, we've seen periods of time where macro has affected the mobility business. If you focus on retention of the customers, that's something that kind of cycles its way through. And so we think of that as kind of a temporary thing. And then we've really been focusing on adding in new growth levers beyond what has been our traditional growth algorithm, and that's where we've been adding in new product capability, which we think will become more meaningful over time, a combination of -- we talked about 10-4, the enhanced acceptance product in mobility as well as field service management, which are places that we're -- that we've invested money that we're seeing a benefit of those investments, and we think will accrete to the overall growth rate over time.

All right. That's awesome. And a lot of things to look forward to. I guess maybe for 2026, just on the -- some of the assumptions, what are you thinking from a macro or the same-store sales perspective at this point relative to 2025?

Yes. That's a really hard question, right? What I will say is, typically, we don't try to make a big guess around this. We tend to project forward what we're seeing. And so I would say like my operating assumption right now is that we're going to assume that you're going to have some macro headwinds, at least in the first half of next year, just kind of because that's what we're seeing happening within the portfolio. And I -- and there are 2 different components of the business. Third, the business is over-the-road market. That's been in this rolling recession for quite a long period of time, and it's a matter of having excess supply work its way through. the cycle, which has been happening over a long period of time. And then on the local business, that has more to do with if our customers have deliveries to make or service calls to make or it could be a sales rep that's driving around. If business activity returns more to normal, then that would be something we would see as a benefit. But I will say like it will be a conversation, I'm sure that we're going to have every time that we're out as we do our Q4 earnings release, I'm sure we'll be talking about this as well.

Of course. Yes, it definitely will follow the updates. And I guess maybe moving along to the Benefits segment. WEX has a strong 20% share of all the HSA accounts in the country and continues to outpace the market growth in the segment. Can you talk about what's driving this from a product differentiation standpoint and maybe longer term, how we can drive incremental volume in the segment?

Yes. So we -- there are 3 things that cause us to be winning and to be outgrowing the marketplace. The biggest you talked about products. So when we first entered this market a number of years ago, we had single point solutions. What we've built over time has been a solution that is -- covers HSA accounts, FSA accounts, lifestyle benefit accounts, health retirement accounts, COBRA benefit administration. And so it is a really strong value proposition to the end customer because of the total capability that we have. That actually sells really well into the marketplace. That's number one and probably the most important thing. The second thing for us is around the distribution channel. So one of the things that makes us unique is that we go into the marketplace directly to an employer, but also go through partners, which is a really important part of how we go into the marketplace. We're a partner with 7 of the 10 largest HSA holders. And so that just gives us a lot more reach into the marketplace. So there's many different ways that people can find their way to X. And then the last thing for us is service is really important on this part of the business. And we think of service is something that we're continuing to focus on how can we remove the shave to a customer through the use of technology. And so it's an increasingly important part of the value that we're offering into that customer segment. And so when we look at this, we think of this as we want to continue to outgrow the marketplace. We think that's important to us. We're going to do a combination of our product capability and just our ability to sell into the marketplace and do that in a very thoughtful way.

All right. That's amazing. And I guess if you look at the SaaS account growth in the segment, it was 6% in the third quarter and HSA accounts are up 7%. And then you mentioned at your last earnings call that the pipeline was looking very strong in open enrollment sales cycle. And again, it's been a little bit. And maybe can you just provide an update there and what you're seeing in the open enrollment. We definitely heard some of the more recent commentary at other conferences, but just if you can give us an update and looking to 2026, what's your expectations?

Yes. So we're a month in. It goes into mid-January. So we still get quite a bit of time. I would say it is progressing as we would have expected it to. It's looking like a strong open enrollment season. The counts come through 2 ways. They come through both directly from us, but they're coming through our partner channels. The one thing we get a lot of questions around the Big Beautiful Bill expanded eligibility for about 7 million consumers, which we would say is about 3 million accounts. That part is a little bit more opaque to us is how much of that will come in. We think it will come in over time, as opposed to having it come in like all at once, but we do believe that you're going to get some benefit of the bill expansion that will happen over a period of time. And so far, I would say what we're seeing is what we would expect to see coming through in open enrollment. We think it's going to be a good open enrollment cycle and kind of the thing that we think is a good long-term trend is the expansion that's happened within the Big Beautiful Bill, BBB.

Right. Awesome. So basically, in summary, things are progressing well and in line with what you had expected when you discussed at the earnings call. it's more up...

Yes. And we'll be actually through the cycle then, so we'll be able to give a more definitive update.

Yes. Awesome. Awesome. Maybe let's look at Corporate Payments. With the segment is now largely lapping the headwinds, including OTA customer pricing model transition and return to the positive organic growth in Q3. You mentioned various investments in product capabilities in the segment as well as the AP Direct product offering where you had ramped salespeople and we're seeing strong volume growth. Maybe can you discuss some of the product investments you have made and how these are resonating in the market?

Yes. So we're really pleased to have the headwind of the OTA lapse in the third quarter because I think that, that puts us in a position of having much more normalized growth going forward. And so that in itself is exciting. We have invested in 2 ways in the products. So think of the product itself, we have -- in the AP Direct product, we've worked on supplier enablement. We've also worked in some of the user interface work, making it just more seamless to our customers. And then on our embedded payments product, we've taken the functionality that we've created with travel customers, and we kind of made it more user-friendly for those people who sit outside of travel. So we've made some very targeted investments across the portfolio. And then as you pointed out, we've added in sales and marketing. In this case, actually, in Corporate Payments, it's been sales. So we've added new salespeople into our direct business. The embedded payment sales team is new. It's something that we've been selling just this year. And I would say in both cases, there are different models. But in the AP Direct product, we've seen like a really great, very repeatable model of we've added salespeople, and you can see that, that actually is delivering. Embedded payments because it's earlier, we're seeing really great customer signings, and we're in implementation phases right now and really excited about the fact we're seeing really strong product market fit and the products that we have in the market.

All right. Awesome. Awesome color in the recast we've heard in the -- I think, it's definitely, I think, a lot of the progress that we've been seeing then just related or -- well, not quite related. But I guess you mentioned, on the other hand, I think it's been a very -- a slightly slower onboarding cycle in the segment. And then how do you think about the paybacks from an investment standpoint, especially as it relates to the sales force investment?

Yes. So on the direct side of the business, those -- so there's a ramp period between you bring a salesperson on. It takes them a few months to become like fully ramped. And then customer implementations are typically a 2- to 3-month cycle. So those payback periods are typically less than 2 years. So it's not immediate, but it's actually pretty fast. When you get into the embedded payments product, the implementation cycles tend to be more like 6 months right now. And so because in that case, the customers coding to our API, beautiful, sticky model once they decide up, but there's a little bit longer implementation cycle. And everything we're saying is that, that has also a very strong payback. But I would say we're still like early in the process with that to be able to -- we have not increased the number of people that are selling there until we actually see more and more of that come through. And we're really focused around how can we reduce the time to first dollar because we know the products are resonating. We know they're selling. We know we're signing customers that we would like to ramp as quickly as we can, those new customer signings.

All right. Awesome. So basically, as you kind of ramp up this motion, first, you have the sales kind of bring to onboard and to train, get them up to speed. And then I think there's also like a sales motion for the implementation. And what's the sales cycle typically like...

The AP Direct is actually pretty fast, in part because the type of salespeople that we're bringing on are seasoned salespeople. They typically are coming in with their own Rolodex. They're able to actually make contact pretty quickly. And so they ramp pretty fast. And we're seeing a pretty quick payback associated with that. So again, it's less than 2 years. It's not immediate, but it's pretty quick.

Understood. That's very helpful. I guess, lastly, on the travel side, what are you seeing in terms of the broader demand environment there?

Travel demand has continued to stay strong. I think in part, like if you look at our business model, our business is global. And that really benefited us this year because we saw changes in patterns. We saw some of the travel move from the United States, which has traditionally come into the U.S. and move into other areas of the world. And so for us, we just -- the volume continued, it just continued in different regions. We've seen rates continue to go up slightly and transaction volume continue to grow across the model. And so it's been a really strong, I would say, just a volume year in terms of what we're seeing in the business. And in the conversations we're having with our customers, it looks like that is a continued trend.

All right. That's very awesome. So I'll probably just wrap up the segments here and move to the corporate level. From a strategic standpoint, you announced that earnings call and also discussed since then, the decision that your various business segments are stronger together. Maybe can you just recap the benefits for us of having these various segments working in tandem and where you see the greatest opportunities to cross-sell?

Yes. Yes. Yes. I think it's a great question is why we brought in 2 independent investment banks because we wanted to really step back and say what is going to create the most amount of shareholder value and is there -- and look across the portfolio. So we brought in Bank of America and JPMorgan. They each independently came back with the same perspective. And when you come right down to it, there's a lot of integration that happens across the different parts of our segments. From the technical infrastructure to the compliance structure to the bank itself, which is pretty meaningful. And so when you start to pull one part apart, it actually has an impact. In addition, you talked about the fact we've had over 200 cross-sells across the portfolio. And one of the places actually we see cross-selling activity is between our mobility customers and our benefit customers. And so for a whole combination of reasons, each of them independently came back and said, if you're going to accrete more value by continuing to focus on the whole of the business and just continue to deliver from an execution perspective.

All right. That's awesome. And I'm sure you've had a ton of conversations with investors over the last month -- past month or so. What are some of the key points you'd like to emphasize after the conversations and maybe what aspects of the business or strategy that you think are still being relatively misunderstood by the investment community?

Yes. I think that the fact that we have turned the corner with the online travel agency and that we're going to be much more in a more normalized growth period, I think that is one of the things is important for us to talk about. I think that there is growing, I would say, conversation around our Corporate Payments business and the fact that we're actually starting to see some of these things like are while still smaller parts of the segment that we're seeing benefit of that, and you can actually start to see that coming through in the reported numbers now. So that has been part of the conversation that we're having with investors, which I would say that's like a growing interest. I think that one of the -- I don't know if I'd call it misunderstood, but one of the things that we think about pretty deeply is the fact that we have really strong moats across our business, and we generate a significant amount of cash flow, like 80% to 90% of our adjusted net income drop through to cash. And so not only does the company grow, but it accretes a tremendous amount of cash. And I think sometimes that gets lost and just like the sheer amount of cash-on-cash return that the company generates. And so it's another point of emphasis for us.

All right. I think that's a great segue to the next topic on capital allocation. I think you ended -- exited Q3 at 3.25 leverage within the range of your longer-term target. How are you thinking about the capital allocation heading into next year?

Yes. So we've been really focused on delevering, and we'll continue to focus. Really, what we're thinking about is we want to make sure that we get below that midpoint. So our range is 2.5 to 3.5x. We want to get below 3. We should get there in this next year. And then as we think about this, we look at risk-adjusted returns in the North Star and where do we think it's going to have the highest impact. You can see that we have bought back a significant amount of stock over the last few years because we felt like that had the highest risk-adjusted return. And we're big believers in the company, and so that's where we put the majority of our money. And I would say that will be a continued bias of ours is making sure that we're utilizing cash and where we think it's got that highest return.

All right. That's great. And then in terms of spending some of the cash flow -- free cash flow generating, I know you're looking to delever at this point. But if there are attractive M&A opportunities come along or maybe some of the tuck-in opportunities, how would you think of that or prioritize that versus share buybacks? And maybe what's the M&A pipeline looking right now?

Yes. So when we've historically looked at M&A, we've looked at scale plays. We've looked at product extensions and then we've looked at international expansion. Scale -- when I think of scale plays, again, that would directly compete with share buyback. Those are -- so what's got the highest return associated with that. Product expansion will become a question of can we build it? Do we partner or do we want to buy it? And so there may be places we think that, that's an important strategic move for us to make competitively. But I would again say that we have more of a bias to building where we can. And international expansion is that's -- you have to have something that's really right down the sweet spot before we'd actually say, okay, that's the place that we want to put -- that we want to deploy capital because typically, it has to have a higher return to have it make sense risk adjusted. And so I would put that further down the list. It would have to fit some other criteria and therefore, we would do it as opposed to just because it's moving us outside the United States.

All right. Awesome. Makes total sense. And as a reminder, investors can -- or anyone here can submit the questions via the app or -- let's see. We don't have a question so far. But if there's any, please feel free to submit and then I'll just follow up with -- like last parting thoughts, I guess I ask you about the investor questions, I guess, maybe just a year from now, hopefully, again, you're sitting here speaking with us. What will be on top of mind or what do you think we should be talking about a year from now?

What I'm really excited about is we have, over the last couple of years, really focused on how to increase our ability to bring product into the marketplace. So it's really focused on the organic growth engine and how to add another lever to that. We're seeing the benefit of that coming through right now. So a year from now, I hope we're talking about the fact that BP has been implemented that we're seeing really great benefit from the new products that we put out into the marketplace and that we are seeing the benefits of the increased acceleration and innovation on -- particularly on the use of AI within our benefits business. And so -- and all of that, when I think about it is what we're trying to do is hit that intersection between data, software, and payments so that we're really helping our customers manage their workflows better. So like a year from now, that's what I'm hoping we're talking about.

All right. Amazing. We definitely look forward to it. And I think with that, please join me in thanking Melissa here. It's been great having you, and we definitely look forward to following your progress.

Thanks. That's great.